Employee Benefit Changes in the Tax Cuts and Jobs Act of 2017

On December 22, 2017, President Trump signed what is popularly known as the Tax Cuts and Jobs Act (H.R. 1) (the “Bill”), overhauling America’s tax code for both individuals and corporations and providing the most sweeping changes to the U.S. Tax Code since 1986. The House and Senate Conference Committee provided a Policy Highlights of the major provisions of the Bill, and the Joint Committee on Taxation provided a lengthy explanation of the Bill.

Compared to initial proposals, the final Bill generally does not make significant changes to employee benefits. The chart that follows highlights certain broad-based health and welfare, fringe and retirement plan benefit provisions of the Bill (comparing them to current law). Notable changes include:

  • Repeal of the Individual Mandate penalty beginning in 2019;
  • Elimination/changes of employer deductions for certain fringe benefits, including qualified transportation fringes, moving expenses, and meals/entertainment;
  • New tax credit for employers that pay qualifying employee while on family and medical leave, as described by the Family Medical Leave Act;
  • Extended rollover periods for deemed distributions of retirement plan loans; and
  • Tax relief for retirement plan distributions to relieve 2016 major disasters.
    In addition, the Bill makes certain narrowly-tailored changes (which we did not include in the chart that follows) impacting only certain types of employers or compensation. For instance, the Bill:
  • modifies the $1 million compensation deduction limitation under Code Section 162(m) for publicly traded companies (expanding the type of compensation which will be applied against the limitation, the individuals who will be considered covered employees, and the type of employers that will be subject to the limitation), with transition relief for certain performance-based compensation arrangements pursuant to “written binding contracts” in effect as of November 2, 2017, so long as such arrangements are not “modified in any material respect”; and
  • creates a new “qualified equity grant” by adding a new Code Section 83(i), which allows employees of non-publicly traded companies to elect to defer taxation of stock options and restricted stock units (“RSUs”) for up to five years after the exercise of such stock options or the vesting of RSUs.
    The Bill also has specific provisions impacting employers that are tax-exempt organizations. For instance, it imposes a new excise tax for highly compensated non-profit employees, and changes the way non-profits calculate unrelated business taxable income (UBTI).

What’s Not Changing

ACA Employer Mandate & Reporting

While the individual mandate penalty has been reduced to zero beginning in 2019, at this time, the employer mandate and employer reporting requirements under the Affordable Care Act (ACA) remain in effect.

In addition, there were no changes to other ACA taxes and requirements. For example, the bill does not eliminate (or delay) the 40% excise tax on high-cost plans (Cadillac Tax) that is scheduled to be effective beginning in 2020, nor does it eliminate the comparative effectiveness research fees paid annually to fund the Patient-Centered Outcomes Research Institute (PCORI) through 2019. However, the Trump Administration has indicated its intention to renew ACA repeal and replace efforts in 2018, which may result in additional changes at a later date.

It has been recently reported that Republican legislators are targeting a further delay of two ACA-created taxes – a 2.3 percent excise tax on medical devices, and an annual fee imposed on health insurers known as the HIT tax – for inclusion in a spending bill that must be passed by January 19. Both of these taxes are scheduled to go into effect beginning in 2018 after a delay was incorporated in a 2015 year-end tax extenders deal. Employer groups have been lobbying for an elimination or delay of the Cadillac Tax and relief on the employer mandate. It remains to be seen whether these tax relief items will be included as part of a spending bill later this month.

FSAs, HSAs, Adoption Assistance and Education Assistance Programs

Earlier versions of the Bill in both the House and Senate included provisions that would have significantly impacted the tax treatment of many employee benefits. However, the final Bill makes no changes to the tax treatment of HSAs, dependent care FSAs, health FSAs, adoption assistance programs, or qualified education assistance programs. Although, it has been reported that repealing restrictions on using FSAs, HSAs and other account-based plans to purchase over-the-counter medications could also be considered during negotiation of the spending bill.

Unsubsidized/Pre-Tax Qualified Transportation Fringe Benefits

While the Bill eliminated the employer deduction for qualified transportation fringe benefits, this change would appear to have the most impact on employers who subsidize transit and parking expenses since they may no longer claim a deduction for subsidized transit expenses (but such amounts would still be exempt for payroll tax purposes). For the majority of employers who do not subsidize transit expenses but offer pre-tax qualified transportation fringe programs that allow employees to enter into salary reduction agreements and receive transit expense reimbursements on a tax-free basis, the Bill should not have an impact on those programs.

Structural Changes to Qualified Retirement Plans and Deferred Compensation Plans

In addition, there were no major changes to the general structure of qualified retirement plans, such as the “Rothification” of pre-tax deferrals in 401(k) plans, nor reductions in the limits that could be contributed tax-free. Nor were other changes that were initially proposed in the House version of the bill to retirement provisions (e.g., changing the minimum age of in-service distribution in retirement plans, modifying non-discrimination rules for “soft-frozen” defined benefit plans, and changes to 401(k) and 403(b) hardship withdrawal rules) included in the final bill.

Earlier versions of the Bill would have also completely upended how deferred compensation by companies to executives is paid by taxing such compensation when it vested. But this provision did not survive in the final Bill.

Next Steps

Only time will tell the full impact of the Bill on employers and employees. For instance, the repeal of the individual mandate beginning in 2019 may result in fewer “healthy” individuals enrolling in health coverage, resulting in increased premiums. Fewer individuals may enroll in Exchange coverage, reducing potential employer mandate penalty (both “A” and “B”) exposure, which is triggered when a full-time employee receives a premium subsidy for Exchange coverage.

Given the changes to the corporate tax rates, it remains to be seen whether employers will alter how they compensate their employees, particularly, highly compensated employees, and how they will handle their pension, 401(k)/profit sharing plans, and other employee benefits.

In addition, it is likely that there will be a correction bill (and IRS guidance) in 2018 to address unintended consequences, omissions, ambiguities, and drafting errors in the Bill. We will continue to monitor for further legislative and other developments impacting employee benefits as a result of the passage of the Bill.

In the meantime, we suggest that employers work with their payroll departments and vendors, accountants, finance, counsel and other advisors to assess the impact of the Bill to its benefit programs and implement necessary changes to their systems and practices.

(Code Section)

Current Law

New Law (Bill Section)

Health & Welfare Benefits

Individual Health
Insurance Mandate

(Code Section 5000A)

The Affordable Care Act imposes a tax
penalty on individuals for any calendar month in which they are not covered
by health insurance providing “minimum essential coverage.”  For 2018, the annual individual mandate
penalty amount per adult is $695 or 2.5% of household income in excess of tax
filing thresholds, whichever is higher.

The individual mandate penalty is
reduced to zero.


Effective Date: Beginning January 1, 2019


(Section 11081)

Medical Expense
Deduction Threshold

(Code Section 213)

Individuals are allowed a deduction
for unreimbursed medical care expenses to the extent that they expenses exceed 10% of AGI.


The medical expense deduction would
be reduced to allow a deduction for unreimbursed medical care expenses
that exceed 7.5% of AGI for all


Effective Date: 2017 and 2018 only (thereafter, the provision would sunset and
the limit would return to 10% of AGI for all taxpayers)


(Section 11027)







Health & Welfare Benefits

Employer Credit for Paid Family and Medical Leave


(No Current Code Section; Bill creates new
Code Section 45S)

The Family and Medical Leave Act
(FMLA) entitles certain employees of covered employers to take twelve weeks
of unpaid, job-protected leave annually for specified family and medical
reasons (e.g., the birth of a child, to care for an employee’s spouse, child,
or parent who has a serious health condition, or for a serious health
condition that makes the employee unable to perform the essential functions
of his or her job).


No current law allows employers to
claim a credit for compensation paid to employee on family and medical leave.


New general business tax credit for
employers that pay employees on family and medical leave, as described by the


An employer must allow all “qualifying”
full-time employees not less than two weeks of annual paid family and medical
leave (and a commensurate amount of leave on a pro rata basis for less-than-full-time
employees). The leave program must provide for at least 50% of the wages
normally paid to an employee.


Vacation leave, personal leave, or
other medical or sick leave would not be considered family and medical
leave.  Leave paid for or mandated by a
state or local government is not
taken into account.


A “qualifying” employee is an employee
who has been employed by the employer for one year or more, and who for the
preceding year, had compensation not in excess of 60% of the compensation
threshold for highly-compensated employees ($120,000 for 2018).


The credit would be equal to 12.5%
of the amount of wages paid, increased by 0.25% for each percentage point by
which the rate of payment exceeds 50% (but not to exceed 25%

of the wages paid). The maximum
amount of family and medical leave that may be taken into account with
respect to any employee for any taxable year is 12 weeks.


Effective Date:  For wages
paid in 2018 and 2019 (provision sunsets after 2019)


(Section 13403)

Health & Welfare Benefits

CPI-U for Tax Code Indexing for Health FSAs, HSAs, transit and
parking limits, “Cadillac Tax” (Code Section 1(f))



Various Tax Code dollar
thresholds/maximum contribution limits are adjusted for inflation based upon
annual changes in the standard DOL-published Consumer Price Index for all
Urban Consumers (CPI-U).


Replaces the use of the CPI-U as the
inflation adjustment with what is commonly referred to as the “Chained
CPI-U.” Use of the Chained-CPIU is expected to result in relatively reduced
inflation adjustments when compared to the standard CPIU-U. It is expected
that statutory maximum contribution limits applicable to HSAs and health
FSAs, among others, would increase at a slower rate than if CPI-U continued
to apply. Similarly, for purposes of indexing the dollar thresholds for
coverage that triggers the Cadillac Tax under Code Section 4980I would also
increase at a slower rate.


Effective Date: Taxable Years Beginning After December 31, 2017
(no sunset)


(Section 11002)















Deduction for
Entertainment, Amusement, Recreation Expenses

(Code Section 274)

Employers may deduct only 50% of otherwise deductible expenses
for entertainment, amusement, recreational activities, and membership dues if
the expenses directly relate to their business.


Employer deduction eliminated
(unless an exception applies).


Effective Date: Amounts paid or incurred after 2017


(Section 13304)

Deduction for Meals,
Food and Beverages

(Code Section 274)

Employers may deduct for ordinary
and necessary

business expenses for meals, food,
and beverages.


Any deduction for meals, whether

entertainment or not, is subject to
a 50%

limit, unless an exception applies.


Food and beverages that can be

from an employee’s income as a de minimis

fringe benefit, including expenses
for an

employee cafeteria located on or
near the

employer’s business premises, can be


Employer deduction eliminated for
meals, food, or beverages, to the extent that such expenses are entertainment,
amusement, or recreation (unless an exception applies).


For amounts incurred and paid after
December 31, 2017 and until December 31, 2025, employer expenses associated
with providing food and beverages to employees through an on-premises eating
facility that meets requirements are subject to 50% limitation.


Beginning in 2026, any deduction for

cafeterias would be completely
eliminated, as

would any deduction for meals
furnished for the

convenience of the employer on the

premises of the employer.


Effective Date: Generally, amounts incurred and paid after
December 31, 2017


(Section 13304)




Deduction for Qualified Transportation Fringe

(Code Section 274)

A taxpayer may deduct the cost of

fringe benefits provided to

including transportation fringe
benefits, even

though such benefits are excluded
from the

employee’s income. Qualified
transportation fringes include parking, transit passes, and vanpools.

Employers can no longer take a
deduction for providing qualified transportation fringes or for expenses
incurred for providing transportation for commuting between an employee’s
residence and place of employment, except for ensuring the safety of an


The tax exclusion for qualified
transportation fringe benefits is generally preserved for employees.


Effective Date: Amounts paid or incurred after 2017


(Section 13304)


Qualified Bicycle Commuting Reimbursement

(Code Section 132(f))


Employees may exclude from their

qualified bicycle commuting reimbursements

of up to $20 per month. These
amounts are also

excluded from wages for employment



Repeal the exclusion for qualified
bicycle commuting reimbursements.


Effective Date: For taxable years beginning

after 2017 and before 2026 (provision sunsets after 2025)


(Section 11047)











Deduction for Qualified Moving Expense


Employees may exclude

moving expense reimbursements from

income and wages for employment tax

Employees will not be able to
exclude qualified moving expense reimbursements from income or deduct moving
expenses, but provides an exception for certain members of the Armed Forces
on active duty who move pursuant to a military order.


Effective Date: Amounts paid or incurred after 2017 and before
2026 (provision sunsets after 2025)


(Section 11048)


Employee Achievement Awards

(Code Sections 74(c) and 274(j))


Employee achievement awards for
length of

service or safety achievements up to
a certain amount are excluded from employees’ income if certain conditions
are met and are also excludible from an employee’s gross income and wages for
employment tax purposes. 


The deductibility of employee
achievement awards is limited by a new definition of “tangible personal
property” that denies the deduction for cash, cash equivalents, and gift
cards, coupons, or certificates, vacations, meals, lodging, tickets to
sporting or theater events, securities, and “other similar items,” except
when employees can only choose from a limited array of pre-selected or
pre-approved items by the employer.


Effective Date: Taxable years beginning after December 31, 2017


(Section 13310)







Retirement Benefits

Extended Rollover
Period for Plan Loan Offset Amounts

(Code Section 402(c))

Retirement plan loans are generally
immediately due and payable when the plan terminates or the participant
terminates employment. If the loan is not repaid (i.e., defaults), the
participant is deemed to have received a taxable distribution to “offset” the
outstanding unpaid loan balance.
Because this “offset” amount is treated like an ordinary
distribution, the participant could make a tax-free rollover contribution to
another retirement plan or an IRA so long as the individual does so within 60
days of the distribution.


Extends the 60-day deadline until the due date
(including extensions) for the participant's tax return for the year in which
the amount is treated as distributed. Plan loan offset amounts qualifying for
this extended deadline are limited to loan amounts that are treated as
distributed solely by reason of either termination of the plan or failure to
meet the loan's repayment terms because of a severance from employment.

The extension applies to plan loans provided
by tax-qualified retirement plans including, Section 401(k), Section 403(b)
and Section 457(b) governmental plans.

Date: Applies to loan offset amounts that are treated as distributions in
taxable years beginning after December 31, 2017

(Section 13613)

Special Relief for
2016 Disaster Victims


Distributions from 401(k), 403(b),
457(b) plans, and IRAs are generally included in income for the year
distributed. Additionally, such distributions received before age 59-½ are
subject to a 10% early withdrawal tax.
If eligible, a distribution from a 401(k), 403(b) plan, 457(b) plan, or

IRA may be rolled over tax-free to
another eligible retirement plan within 60 days.


The Act
provides tax relief for certain retirement plan and IRA distributions taken
on or after January 1, 2016, and before January 1, 2018, by individuals: (1)
whose principal place of abode was located in a presidentially declared
disaster area at any time during 2016, and (2) who sustained an economic

loss by
reason of the events giving rise to the disaster declaration.


The relief
is similar to the retirement related tax relief enacted after Hurricanes Katrina,
Wilma, and Rita in 2005, and Hurricanes Harvey, Irma, and Maria in 2017.




Retirement Benefits

Special Relief for
2016 Disaster Victims



aggregate distributions from all eligible retirement plans eligible for tax
relief is $100,000. The tax relief includes:

·       relief from the 10 percent
early withdrawal tax and from the 20 percent mandatory income tax

·       the distribution will be exempt
from certain statutory limitations, such as 401(k) plan restrictions on
taking distributions of pre-tax deferrals before age 59-1/2;

·       taxable income from the
distribution may be spread out ratably over three years; and

·       any portion of the distribution
may be recontributed as a “rollover” to any eligible retirement plan to which
a rollover can be made within a three-year period from the year of the


Any retroactive plan amendments made to adopt the tax
relief provided by the Act (or by a regulation issued thereunder) may be made
by the last day of the first plan year beginning after Dec. 31, 2017 (i.e.,
December 31, 2018 for calendar year plans).


Effective Date: Date Bill’s



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